Performance must be worthwhile again: Exempt overtime from income tax!

_ Yuri Kofner, economist, MIWI Institute for Market Integration and Economic Policy. Munich, 8 November 2023.

The shortage of qualified labour is one of the biggest problems facing the domestic economy. In June 2023, the skills gap nationwide was just under 528,000 vacancies that could not be filled with suitably qualified unemployed people. [1] On average for 2022/2023, there was a shortage of 157,401 qualified workers in Bavaria (skills gap). This means that there were no suitably qualified unemployed people for an average of 62.4 per cent of all vacancies (vacancy surplus rate). [2] According to a forecast study for the vbw, there will be a shortage of around 350,000 skilled workers in Bavaria in 2025 and just under 3 million in Germany.[3]

One aspect of meeting the challenge of the increasing shortage of skilled labour due to the demographic decline is to increase economic productivity in terms of total hours worked and, in particular, the number of overtime hours worked per employee. Incentives should be created to encourage existing employees to work longer. Unfortunately, between 2011 and 2021, the average number of hours worked per year per employee fell from 1,427 to 1,349, putting Germany at the bottom of the OECD countries.[4] The volume of overtime in Germany has almost halved from 1.1 billion hours in 2000 to less than 600 million hours in 2022. In 1970, the volume of overtime was still at 3.6 billion hours.[5]

One of the main reasons for this decline in additional working hours is the relatively high tax burden on labour in Germany in general and on overtime in particular. The average German employee will have the second-highest wage tax and social security contribution burden in the world in 2022: 48.3 per cent of gross wages will be deducted.[6] In an international comparison, Germany had some of the highest unit labour costs in the manufacturing sector in 2021/22 (44 euros per hour)[7] and the sixth-highest labour costs in the private sector in the EU (40 euros per hour).[8]

In order to address both problems – the shortage of skilled labour and the high tax burden on labour – overtime worked in excess of 40 hours per week should be fully exempt from income tax. A wealth of research literature, e.g. from IZA,[9] Banca d’Italia[10] and IMF,[11] shows that a reduction in income tax increases labour supply, especially in the form of overtime worked. Put simply, performance must be made worthwhile again.

The resulting lower income tax revenue for state budgets at federal and state level will be partially offset by the productivity-enhancing effect of the tax exemption. Any additional loss of revenue can be compensated for by reducing unnecessary government spending on migration, climate and other government interventionism. According to Peter Boehringer, the AfD parliamentary group’s budget policy spokesman, the potential savings at federal level amount to around 90-100 billion euros per year. And according to calculations by the AfD parliamentary group in the Bavarian state parliament, around 2.6 billion euros can be saved annually in the Free State of Bavaria. In addition, possible losses in revenue for the federal states and local authorities should be compensated for by restructuring the distribution key for tax revenue in favour of both.

Notes

[1] Quispe V., Tiedemann J. (2023). Fachkräftereport Juni 2023. KOFA. URL: https://www.kofa.de/daten-und-fakten/studien/fachkraeftereport-juni-2023/

[2] KOFA (2023). URL: https://www.kofa.de/media/Publikationen/Laendersteckbriefe/Bayern.pdf

[3] Vbw (2019). Arbeitslandschaft 2025. Prognos. URL: https://www.vbw-bayern.de/Redaktion/Frei-zugaengliche-Medien/Abteilungen-GS/Sozialpolitik/2019/Downloads/20190221_Arbeitslandschaft-2025_final.docx.pdf

[4] OECD (2022a). Hours worked. URL: https://data.oecd.org/emp/hours-worked.htm

[5] IAB (2023). IAB-Arbeitszeitrechnung. URL: https://iab.de/daten/iab-arbeitszeitrechnung/

[6] OECD (2023). Taxing Wages 2023. URL: https://www.compareyourcountry.org/taxing-wages/en/0//ranking/

[7] Schröder C. (2022). Lohnstückkosten im internationalen Vergleich. Kostenwettbewerbsfähigkeit der deutschen Industrie in Zeiten multipler Krisen. IW Köln. URL: https://www.iwkoeln.de/studien/christoph-schroeder-kostenwettbewerbsfaehigkeit-der-deutschen-industrie-in-zeiten-multipler-krisen.html

[8] Herzog-Stein A., Stein U. (2023). Arbeits- und Lohnstückkosten – Entwicklung 2022. IMK. URL: https://www.imk-boeckler.de/fpdf/HBS-008643/p_imk_report_183_2023.pdf

[9] Frederiksen A. et al. (2001). Overtime Work, Dual Job Holding and Taxation. IZA. URL: https://www.iza.org/publications/dp/323/overtime-work-dual-job-holding-and-taxation

[10] Attinasi M.G. et al. (2016). The effects of labour income taxes on labour market performance: an empirical analysis. Banca d’Italia. URL: https://www.bancaditalia.it/pubblicazioni/altri-atti-convegni/2016-current-issues-fiscal-policy/Attinasi_Berardini_DeStefani_Osterloh.pdf

[11] Velasquez A., Vtyurina S. (2019). How Does Taxation Affect Hours Worked in EU New Member States?. IMF. URL: https://doi.org/10.5089/9781498315708.001.A001

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